Wednesday, August 27, 2014

Why does an urban section cost $200K plus???

This is something the Productivity Commission noted in their Housing Affordability report. Land values 2 km outside a rural/urban zone boundary are something like 10% of the urban side of that squiggle on a map.

Good rural land is worth around $50K/ha - that's $5/sq metre. Allow 33% loss for roads, utilities and reserves, and that one hectare will yield 11 600 sq m plots: that's a raw land price of 50,000/11 or $4,545 for your urban section.

What pumps it up to (typically) $180-$300K?

Well, first of all, that zoning boundary instantly inflates the raw land cost by say 8 times: $36K

1 - Time taken - interest will double any early costs (like land purchase, survey, consenting etc) every 6-7 years. Allowing say $5K/plot for plans, survey etc, so land value is $41K. Allow 7 years from pony paddock to sale, and the raw land cost is now $82K for that one plot.

2 - Council development contributions. Ostensibly for reserves and green space, these have blown out over the years to include all manner of social and cultural objectives. Allow $40K per section. Raw land cost is now $122K/plot.

3 - Of course there will be services, roads, etc to apportion. Allow $50K per plot. Raw cost is now $172K/plot.

4 - Nobody does any of this for free, so allow a developer's margin of 20% or $34K/plot. Cost is now $206K/plot.

5 - And then there's GST on the sale price at 15% so add $31K tax" plot price is now $237K.

See? The magic of compounding.

Now if any developers are reading this, I issue a challenge.
As a comment, tell us a typical per-plot breakdown......

And if any planners are reading this, tell us, with a straight face, that your squiggles on maps don't have an inflationary effect on raw land prices, and have arguably set off this baleful ratchet effect.....

And if any consent wallahs are reading this, tell us that injecting Time into processes does not incur use-of-money costs via direct interest on capital committed, or opportunity cost if funded from raw cashflow (could have banked that money and gotten interest).

It's a simply dreadful cycle of local authorities' economic cluelessness, I'm afraid. Firstly by creating artificial boundaries which create capital gain for the landholders and a direct cost to home purchasers, secondly by injecting direct cost (DC's, consent fees, etc), and thirdly by injecting Time (= money in the real world) into each and every process step.